Coats Group plc (COA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Coats Group plc 2020 Half Year Results Conference Call. My name is Hanna, and I'll be coordinating your call today. [Operator Instructions] I'll now be handing over to your host, Rob Mann, to take over. Rob, when you're ready.

Thank you, Hanna. Good morning and welcome to the Coats 2020 half year results presentation. I'm Rob Mann, Head of Investor Relations at Coats. The presentation today will be hosted by Rajiv Sharma, our CEO; and Simon Boddie, our CFO. Once the presentation is done, we will open up for the Q&A. And with that, I will pass you over to Rajiv.

Thank you very much, Rob. The agenda for today starts with a high-level H1 introduction by me. Simon will follow with the financials. And as you would expect, they have been impacted by the COVID pandemic. I will then end with a business update before opening up for Q&A. Moving on to the next slide. In most of H1, the world has been in a firefighting mode dealing with the twin crisis of a global pandemic and a global economic slowdown. I'm proud of the way Coats responded to the disruption and challenges caused by COVID. The speed and scale of our comprehensive actions to protect employees and their families has been unprecedented. Empathy, compassion and care, along with the use of science, data and technology, characterized our response from the beginning of the pandemic. The quick and comprehensive response also underpinned our operational and financial performance as we made a hard pivot to focus on cash conservation and controlling the controllables. We have seen an improving sales trend through quarter 2 and into July. As factories reopened, we had a motivated workforce and capacity to respond quickly to customer orders. Speed, agility and reliability of our supply chain, coupled with local technical expertise, has resulted in new customer wins. We have completed our largest acquisition to date with Pharr High Performance Yarns in the U.S. This gives us a leading position in the U.S. personal protection yarn market. We are currently in the process of integrating Pharr into Coats. So in summary, we have delivered a strong cash performance in H1 and are starting to see encouraging signs in the market. Our focus has shifted to winning the recovery. Slide 5 outlines our 3 priorities for 2020. Health and safety is core to the Coats value and has always been our top priority. During the pandemic, we extended our COVID-19 prevention actions beyond employees to include their families and communities in which they live. I'm very proud of our teams who have faced this crisis with grit, courage, determination, humility and empathy. It's not been easy, but the organization has pulled together. We proactively sourced health care PPE across the world; delivered 200,000 hours of training; organized medical and wellness campaigns; invested in touchless technologies in our factories; developed an app to track, trace and isolate COVID cases; ensured appropriate medical care for serious cases; and hired more doctors and nurses to go into communities. During this period, Coats has donated 60 million feet of thread for the manufacture of millions of face masks. Since the pandemic started, we have not made any redundancies or permanently closed operations, although we did need to flex our shift patterns and capacity to match lower demand. Even when factories were closed, frontline employees received full salaries and benefits. Our second priority has been to support customers and suppliers. I will talk more about this later and specifically how this positions Coats to win the recovery. Our collaborative and supportive approach is paying off with meaningful customer wins and no supply issues. Lastly, we have focused on cost and cash optimization while continuing to invest in health and safety, ESG and innovation. Despite the pandemic, we remain in strong financial position with plenty of headroom to invest in the most attractive opportunities as we enter the recovery phase. And with this summary, let me hand over to Simon for an update on the financials.

Thank you, Rajiv. I'd now like to take you through the key details of the results for the half year, which are set out on Slide 7. Organic sales decline was 26% as the group was affected across both divisions by the COVID-19 pandemic during the period, particularly in the second quarter. On a CER basis, our revenues declined by 21%, which included a 5% contribution from the Pharr acquisition, which was completed in February. Our operating profits were also impacted by COVID in the period, which were down 66% year-on-year, as negative volume leveraged impacted operating margins adversely. However, this impact was partially mitigated by the proactive underpinning measures that we took across our cost base. I'll come on to explain the detailed drivers behind the performance in the next slide. At an adjusted EPS level, our earnings reduced to $0.00 for the period as a result of lower operating profits, a higher-than-normal effective tax rate again due to COVID profit impacts and also mark-to-market foreign exchange losses, the latter primarily being due to sterling weakness against the U.S. dollar during the period. Despite the COVID impacts on the P&L, our cash performance was strong. We delivered an adjusted free cash outflow in the period of $5 million as we managed working capital tightly and also reduced capital expenditure significantly. This cash performance enabled us to deliver leverage of 1.3x EBITDA at the end of the period and maintain significant headroom on our covenants and keep comfortable liquidity available. Our return on capital employed reduced to 28% largely due to the lower operating profit as we managed our asset base effectively despite the disruption from COVID. Lastly, and as part of our balanced stakeholder approach to maintaining a comfortable level of headroom through this period of uncertainty, the Board has decided not to declare an interim dividend. As performance progresses, our visibility increases. We'll keep future dividends under review. On Slide 8, you can see the details of the operating performance of the business. Overall sales decline on the constant exchange rate organic basis was 26%, as I mentioned earlier, which consisted of an 8% decline in the first quarter and a 45% decline in the second quarter when the COVID global lockdowns took hold. It is encouraging that we saw an improving sales performance during the second quarter, and our underlying June exit rate was a 25% decline as demand started to improve. The organic sales performance across our 3 regions was similar. In our Asian business, which is predominantly an Apparel and Footwear business, we saw revenues decline by 27% as certain of the large markets in this region, namely India and Bangladesh, were impacted by severe government lockdown measures. In India, there was a period of around 6 weeks in the second quarter when all our manufacturing facilities were under enforced government lockdown. And so sales were minimal during that time. Elsewhere, we saw relatively less affected markets in terms of lockdown like Vietnam fared relatively well as manufacturers of brands move volumes between countries, demonstrating the strength of our global footprint to adapt to rapid supply chain shifts. In the Americas, our revenues were down 27% organically and 6% down when including the impact of Pharr. We saw a relatively robust performance in North America, which is predominantly due to the more resilient performance of our Personal Protection business, which is the largest end-use segment within Performance Materials. There was some offset to this performance in Apparel and Footwear, particularly in the key Latin American markets, such as Mexico and Brazil. In EMEA, we saw our revenues reduced by 24%. This is a relatively dispersed region in terms of operations. Certain markets were hit hard by COVID-19, such as our Italian zips business while there were encouraging signs of recovery later in the period in markets such as Turkey. As I mentioned earlier, our adjusted operating profits were down 66% in the period to $34 million due to the significant volume impacts from the COVID disruption, which depressed gross margins. Despite the severe volume impact, we quickly mobilized underpinning actions to impact -- to limit the impact on margins. This meant flexing our manufacturing footprint by managing the number of shifts and working hours as well as reducing our SG&A cost base by 21% during Q2, and Rajiv will talk to you more about these responses later. We also saw some benefits from the lower oil price in the period and some offset from adverse mix, and we expect these impacts to continue into the second half. I would also note that whilst COVID has increased the customer credit risk that we face, we've done a good job to manage this risk whilst collecting the cash, resulting only a small $2 million increase to our bad debt write-off year-on-year. And as a proportion of overall revenues, this remained low. Overall, our operating margins reduced by 820 basis points to 6.4% in the period, which included a 40 basis point diluted impact from the Pharr acquisition. On Slide 9, we set out the performance of the business across the 2 operating segments, Apparel and Footwear and Performance Materials. Rajiv will talk to you later about the revenue performance in these businesses, so I will cover only the margin impact for now. Overall, we saw broadly similar declines to organic operating margins across both Apparel and Footwear and Performance Materials while declined to -- which declined to 750 basis points and 840 basis points, respectively. Whilst both businesses were impacted by COVID, Performance Materials fared slightly better on a revenue basis with organic revenue decline of 19% versus the group organic sales decline of 26%. Despite this, the Performance Materials margins were impacted to a similar extent as Apparel and Footwear as a result of the lower scale in the Performance Materials business and therefore, less ability to significantly flex operations to mitigate the adverse operating leverage impact in our plants. In addition, both businesses were impacted by adverse mix in the period, albeit impacting Performance Materials slightly more. On a CER, Performance Materials margins were down 940 basis points, which is a 100 basis points more than the organic decline due to the initial diluted effect of the Pharr acquisition. Over time, we expect Pharr margins to increase towards group margins and therefore, the diluted impact to reduce. On Slide 10, we show the bottom half of the profit and loss account at reported currency rates. I've also -- I've already explained the drivers of the decrease in adjusted operating profit, so I'll focus on the items below this. Exceptional and acquisition items relate predominantly to the $5 million noncash impairment charge at some of our smaller European markets, whose performance outlook has been adversely impacted by the COVID situation. There was some offset from this impact by our property sale in Korea, which is one of the final parts of the Connecting for Growth program, which concluded last year. Finance costs were $3 million higher than last year. This is primarily due to the mark-to-market foreign exchange loss of $6 million in relation to the sterling weakening that I referred to earlier compared to a $2 million loss last year. On tax, we saw an increase in our effective tax rate of 48% compared to 29% last year. This is primarily due to the unusual profit mix impacts resulting from COVID-19, including some unrecoverable losses that were generated in the second quarter as well as ongoing withholding tax payments in certain overseas markets that did not reduce in line with profits. In addition, profit before tax was impacted by the $6 million mark-to-market foreign exchange loss that I mentioned earlier. Excluding this impact, the underlying effective tax rate was 41%. Our expectation over time is that our effective tax rate should return to precrisis levels. On Slide 11, you can see the strong cash flow performance in the period despite the significant COVID impacts on our profit and loss account. At an adjusted free cash flow level, we delivered a small outflow of $5 million compared to a $20 million inflow last year. This is despite a $69 million reduction in EBITDA for the period as we successfully managed our working capital, delivering a $2 million inflow compared to what is normally a significant working capital outflow in the first half for our group. And as a percentage of sales, we kept working capital flat year-on-year at 13%. We also underpinned cash flows by significantly reducing capital expenditure from $22 million last year to $13 million this year. We were also able to take advantage of government COVID-19 support packages, which run over in a number of countries. And this included $12 million of tax payments, which were deferred from the second quarter to the second half of the year. Our closing net debt of $207 million, excluding leases, was in line with the same time last year despite COVID and the acquisition proceeds being paid for Pharr of $37 million. This level of net debt equates to a leverage of 1.3x EBITDA, which is comfortably within our 3x covenant. At 30th of June 2020, we had committed facility headroom of $270 million. This headroom excludes the GBP 300 million CCFA facility, which has been secured and provides additional headroom if required. On Slide 12, we lay out the key quarterly trends we have seen so far this year that have impacted net debt, and those will be considered relevant for the remainder of the year. As you'll appreciate, COVID has had an abnormal impact on our usual cash flows and profit generation profile. In Q1, where the business was less impacted by COVID, we saw normal seasonal increases in net working capital as well as the purchase price that we paid for Pharr, which together led to an increase in net debt. Throughout Q2, COVID significantly impacted our business, and we moved rapidly to underpin cash flows, which included controlling our working capital. This meant focusing on managing our customer credit risk closely and collecting our debtors on time, which resulted in a relatively low level of bad debt write-off. It also meant flexing our purchases downwards to reflect the lower level of demand seen in Q2. We also moved quickly on other cash underpinning measures such as accreting deferrals on our U.K. pension payments, canceling our plan may -- dividend payment as well as reducing capital expenditure and taking advantage of government support. These underpinning measures led to a significant reduction in our net debt in Q2, ending at $207 million in June, as I referred to on the last slide. In second -- in the second half of the year, we expect to see some increase in our net debt and leverage. Whilst we continue with many of our cash underpinning measures, collections will inevitably be lower in Q3 due to the reduced sales seen in Q2. And having taken advantage of government schemes to delay tax payments in Q2 of around $12 million, these will be paid in the second half. With that said, as our sales gradually improve, negative operating leverage should reduce, which is likely to drive up gross margins and profitability accordingly. Looking forward, the working capital dynamics of the net -- our net debt profile will be impacted by the shape of the recovery profile we see, which, of course, remains uncertain. The quicker the recovery, the more we will have to reinvest into working capital in order to support service and ensure we maximize the opportunities that the recovery will present. So finally from me and before I hand back to Rajiv, I wanted to summarize our financial performance for the first half of the year. Whilst COVID has had a profound impact, I'm proud of our flex on cost base to underpin the P&L, and it's good to see demand improving during the second quarter and into July. This leaves us in a comfortable position on our banking covenants and with significant committed facility headroom. We maintain a strong balance sheet, which should allow us to take advantage of the recovery. And with that, I'll hand you back to Rajiv.

Thank you, Simon. Slide 15 shows the time line of how the demand and supply situation unfolded in the first half. We experienced lockdowns in China during February and most of March. In mid-March, the WHO declared COVID-19 a global pandemic. Following that announcement, we noticed a rapid decline in our order book with customers canceling, delaying or amending existing orders and holding back on making new commitments. This resulted in a Q1 sales decline of 8%. The worst of the COVID storm hit and represented roughly 50% of global capacity were closed due to government enforced lockdowns. Organic sales were down 58% in April and 53% in May. From late May, lockdown restrictions gradually eased. Since then, we have started to see an improving demand trend. Organic sales were down 25% in June and more recently, down 18% in July. Currently, 1 small factory is subject to government enforced lockdowns while all the others are open and sort of operating normally. With an improving demand trend since June, a strong balance sheet and a highly committed team, we are now focused on winning the recovery. Slide 16 lays out a number of actions we have taken to underpin financial performance. With multiple stakeholders in mind, we have taken a balanced approach to cost and cash actions. We have also flexed the capacity and factory shifts to give us the optimum balance of customer service and lower cost. We will continue with the same focus on cost and cash in the second half of the year. Actions to conserve cash included a 70% reduction in CapEx for the full year to roughly $15 million, of which we have done $13 million in the first half. It is worth flagging that the majority of this reduction in short -- is short-term growth CapEx, which can be turned back on when demand returns to above 2019 levels. The ongoing spend is focused on health and safety, compliance and sustainability. Some other actions of cash and cost actions taken in the first half are a 20% reduction in pay for the Board, management and office staff during the second quarter; buying less raw materials as demand was low; factory operating costs were lower due to lockdowns; SG&A costs were down 21% during the second quarter as we cut travel third-party services, office expenses and discretionary spend; prioritized cash collection from customers; got into an agreement with the U.K. pension trustees to defer the remainder of the 2020 pension payment; and cancellation of our most recent dividend while keeping the final 2020 dividend payment under review. Lastly, if required, we have access to a further GBP 300 million of funding from the Bank of England CCFF. It's always good to have an additional safety net in uncertain times. Now let me turn to the 2 businesses, both of which saw significant COVID-related demand impacts during the period. Slide 17 shows some of the key parts of our Apparel and Footwear performance in the year. As Simon said, revenues were down 29% in the year, and this business was particularly hit hard by lockdowns in key Asian sourcing markets during the second quarter. This supply impact was exacerbated by the lockdowns in the West, which meant our large brand customers only have the online channels to sell through. As both the demand and supply shock has eased, our Apparel and Footwear sales have started to recover. The Apparel and Footwear market overall is about $1.8 trillion at retail price. It is estimated that this market will be approximately 30% down this year. As the world recovers from COVID, we expect sporting goods, athleisure, home ware, luxury goods and online retailers to do well. The lower cost mass market segment should also do well. The mid-market and fast fashion segments will be the most challenged. Some players are reinventing themselves by focusing on sustainable products and niche segments. While Coats is relatively less represented in the mid-market today, it should benefit from the emerging focus on more sustainable and durable products. During H1, customers have been particularly focused on reliability of supply, recycled products and in-country technical support. We have now expanded the range of recycled products from 15 to 53 during H1 of this year. Our sales in H1 from recycled products grew 3x. This is one area where demand is more than supply. From 2 suppliers in the first half of last year, we now have 7 suppliers approved to deliver recycled polyester with an additional 2 suppliers in advanced stages of our approval process. Now turning to Performance Materials on Slide 18. Overall, sales were up 2% in the period. Excluding the Pharr acquisition, our organic sales were down 19%. By end market, we saw relatively resilient performance in Personal Protection with organic sales down 16% in the first half. Fire protection and military end markets were robust in the U.S. Telecoms continued to be a little dampened as the 5G infrastructure rollout now looks more likely to commence at pace in 2021. With low oil prices and low oil demand for the rest of the year, we expect the energy end market to be soft for the rest of 2020. Overall, sales in telecom and energy combined were down 21% in the first half. Transportation was hit hard due to car factories being shut down for 2 months in North America and Europe during the first half. Western auto sales have rebounded slightly in June and July, but we expect full year global production to be down between 15% and 20% year-on-year. From a cost perspective, there are some 2 interesting developments that have happened in the first half. First, we have received a grant from the Department of Energy to work with the U.S. automotive OEM to supply our latest technology to lightweight cars. Second, we have shipped our first carbon composite part to a European automotive OEM. Our initial contract is to manufacture 2 different carbon composite parts that replace conventional steel parts in a car. In H1, we launched Protect+. This blends antimicrobial characteristics into existing flame resistant and cut resistant products. Another new product launch in H1 was towards liquid fence. This does not allow water droplets and moisture to pass through the seams. In the second half, this product will be going through certification for use in health care gowns in the U.S. In Q1, we completed the acquisition of Pharr High Performance Yarns in the U.S. This gives us a leading position in the U.S. personal protection market, but primarily caters -- that primarily caters to Pharr services, industry workwear and military. We now have the capability and capacity in the U.S. to serve a vast variety of personal protection niches in the U.S. On Slide 19, it showcases some of the actions we have taken as a responsible global market leader during the COVID crisis. We have gone to great lengths to support the health care PPE industry. For example, we have donated 60 million feet of thread for the production of millions of face masks. We have partnered with like-minded technology companies to launch Coats Fast Start and joined the Global -- Gerber connect task force. Coats has made over 100 COVID PPE production engagements to support textile mills to reconfigure their manufacturing to produce masks, gowns and gloves for medical use. I have spoken about Coats Protect, our antimicrobial thread on the previous slide. This week, we announced a partnership with HeiQ, a Swiss technology company, to incorporate HeiQ Viroblock technology into our products. The HeiQ Viroblock is amongst the first textile technologies in the world to be proven effective in laboratory testing against SARS-COVID-2 virus, which comes from the same family of coronaviruses that of COVID-19. While corporate responsibility and doing the right thing have been the main drivers for our actions during the COVID pandemic, we may unlock future commercial opportunities emerging from the COVID crisis. We will explore the size and attractiveness of the health care sector and should have an update in 2021. Moving on to the next slide. During the COVID crisis, it's been even more important to focus on serving customers and Slide 20 outlines 4 pillars. Firstly, our quality products and reliable delivery throughout this period of uncertainty have been a great source of reassurance to our customers. Coats has the largest footprint that ensures speed, reliability and resilience of supply to customers. During the past 3 years, brands have been derisking their sourcing from China due to cost and concentration reasons. This trend will continue into the medium term. Coats benefits from the strength as we pick up business when it moves to other sourcing countries. The COVID pandemic will push the industry towards more supply chain flexibility, transparency, speed, resilience and automation. During H1, we launched 13 new products, resulting in $5 million of sales. In response to COVID-19, our innovations hubs have launched a range of products that are antimicrobial, water and moisture resistant, have more stretch and elasticity and provide glow-in-the-dark features for our direct wear. In addition to that, we continue with innovation in personal protection, recycled products and the use of carbon fiber to lightweight from shoes to surfboards to car parts. Sustainability and responsibility have become even more important to the industry during the COVID crisis. We continue to invest in sustainability and are progressing towards our 2022 targets. I'm pleased to report that Coats has again qualified for the FTSE4Good and done better than last year with ESG rating agencies. This is a differentiator and source of competitive advantage for Coats. Lastly, in the digital space, we remain an industry leader in terms of providing customer-facing tools and expertise. During H1, Coats has hosted many webinars to help customers with technical issues relating to governments and to troubleshoot their supply chain issues. Coats has a reputation of being a trusted and dependable player in the market. We are winning new customers and are well placed for accelerated share gains in the future. Slide 21 has our rest-of-the-year outlook statement for your consideration. I do not intend to read it out word for word. However, its essence can be summed up in 3 points. First, we have seen an improving sales trend through Q2 and into July, but please note the peak months of September to November are yet to play out. Second, macroeconomic uncertainty will continue into the near term. And third, the group is well placed to financially and operationally navigate through the current macroeconomic environment and win the recovery. To wrap up, Slide 22 highlights key enablers to winning the recovery. First, despite continuing uncertainty and low demand visibility, we have seen an improving sales trend, and this is quite broad-based across all major regions. Customer discussions are now mostly focused on near-term demand and how to win in a post-COVID world. Coats is a market leader with unrivaled global scale. We are flexing our supply chain to meet customer requirements of reliability, speed, quality and local technical support. Given our global scale, we give customers a choice to source our product in 6 different continents. COVID has accelerated existing trends like speed, sustainability, digital innovation, compliance and transparency within the supply chain. We have invested early to build capability and capacity to benefit from these trends over the past few years. Coats continues with its financial discipline. It entered the COVID crisis with a strong balance sheet. We have gone through an extremely tough first half and yet end the period with a strong balance sheet and comfortable headroom. This gives us the ability to continue investing in the business and optionality to explore value-adding acquisitions in line with our strategy. Winning in all conditions requires exceptional talent. Coats is proud to have the world's best industrial thread team. Technology is the first multiplier and will be even more critical in a post-COVID world. It's exciting to be part of the dynamic Coats team that believes our best days are in front of us. And with that, I hand back to Rob to open the floor for Q&A.

Great. Thank you, Rajiv. Hanna, please can you open the lines and take questions?

[Operator Instructions] Our first question comes from Charles Hall.

A couple of questions from me. Rajiv, you mentioned a bit about sustainability. Just be interested to explore that in more detail. Is that -- is there a lot of focus on sustainability during the COVID-19 period? Or are some brands actually accelerating their focus because that's going to be a key theme coming out of this? And also, there's obviously been some high-profile press articles on this particular issue recently. How do you see that in the context of Coats? And secondly, I know you talked about giving an update on the PPE opportunity in 2021. Are you able to give any initial thoughts on how this might play out for Coats because it does appear that you're ideally placed to come up with new products for this particular area?

Okay. So let me start with the first one. So what we have seen in -- during sort of -- during the pandemic period, let's say, from February to June of this year, we have seen an increased intensity of discussions with customers, especially in the mid-market, who are looking to reinvent themselves around sustainable products. And without going into specific brand names, et cetera, what we are seeing is that they are demanding more and more recycled polyester thread. Because they want to reposition the brand from being just a fast fashion, cheap and chirpy sort of brand to something that is focused on sustainable and durable products. What we have seen, Charles, is that our sales for recycled products have grown over 3x compared to H1 of last year during the pandemic period. As a result of a lot of discussions we had in the second half of last year and ongoing into this year, we have expanded the number of products we have with recycled polyester from 15 products last -- in H1 last year to 53 products this year. So we really see this as sort of a new emerging and sort of trend, especially in the mid-market, and there's a sense of urgency also. In terms of the premium sporting good, the usual big sporting good brands, they have been on this sustainable and durable journey for quite some time. They continue to be focused on that. And there's nothing new in that. So I see that the mid-market is going to create opportunities for us going into the rest of the year and, of course, in 2021. With respect to the health care PPE, we were actually quite surprised ourselves, and we've learned a lot in the last 4, 5 months in terms of how our products can actually be applied in the use of making face coverings or face masks and how we can use very specific chemical coating or different manufacturing technologies that will help improve the safety and the efficacy of health care gowns. So this is something that we are learning. And as you know, a lot of this -- anything that goes into the health care has to go through an appropriate certification process in each of the countries. Right now, we are focused on the U.S., and we have got multiple products that will be going through the U.S. FDA approval process in the second half. And that's linked to gowns and masks. So we'll see how that sort of happens. The other exciting thing, which was the announcement we made this week, which is the partnership with the Swiss company, is around applying some of their unique IP and technology to our yarns so that they can then eventually manufacture the world's first antivirus garment, okay? So that's sort of the big thing that they are trying to do. And thread is an important part of that. So we are sort of supporting that. Now how this thing plays out into the future is hard to say. But at least we know that we have the ability to be able to provide a thread, which can meet the needs of the health care industry.

And Rajiv, just going back to sustainability, you've obviously seen strong growth, but the issue has been more on the supply side. I'm encouraged to hear that you're adding new suppliers. What extent of capacity increases is likely to provide?

So in -- so this year, the supply of recycled polyester will be 10x more than all of last year. And we have gone from 2 suppliers last year to 7 this year, and we have another 2 suppliers that are going through the approval process. So we are working very hard to make sure that we debottleneck the supply issue so we can actually serve more and more customers.

Our next question comes from Maggie Schooley of Stifel.

I guess the first question I would have is somewhat challenging to answer. Obviously, the trends you're seeing are very encouraging with July showing even more improvement. But as we look through to the peak periods in September through October, do you have any level of visibility? Or are there any conversations you're having with your clients that give you some comfort that perhaps the trend that we are seeing will continue, albeit I know there's quite a bit of uncertainty? That would be my first question. And then the second question, if we could touch on, is digital has been a key enabler for you during this pandemic, both to be able to respond quickly but as people were in lockdown. Can you give us an idea of your customer base? How much more is to go in terms of clients that are not yet engaged digitally or only engaged in 1 section of your offering and could expand? So those are the 2 key questions I had.

Okay. So Maggie, thank you very much for the question. If you don't mind, I'll start with the easy one, which is the second one first, and then I'll move to the first question. So 85% of our orders are captured through our proprietary e-commerce platform. And that is a vast bulk of our large customers and our key strategic customers. The balance 15% is really the tail. It's very, very, very small customers. And there is no upside for us to actually go beyond 85%. So we believe that beyond 85% is a point of diminishing returns. And we are able to service the balance 15% reasonably well through other sort of means. So that's on the digital part of it there. With respect to the first question, as you rightly outlined, it is challenging. The principles that we have used during this pandemic sort of crisis is facts back and scenarios forward because there's so much of uncertainty, it's hard to forecast, it's hard to give a sort of a target or a directional view. So we look at scenarios. Let me give you some leading indicators that we are seeing that might give you some sort of a directional feel for what the September to November might look like. So the first thing is that we have seen more and more customers releasing their orders and their view of what the rest of the year might look like. And that is actually a really positive development given the fact that for most of H1, they were not even showing us what sort of the second half would look like. So I think there is growing confidence amongst our customers that they can start to release or at least show what demand's going to be looking like in the second half of the year, okay? And it's not all that bad. Secondly, as we enter into the peak period of September, typically, what happens is a lot of the garment factories start to go through sampling processes where they are looking to produce prototypes of thread with specific colors that are used in the bulk manufacture of products between September and November. The sampling activity has picked up. It's sort of at normal levels we would see. And across most of the Asian markets, which is where a lot of the apparel and footwear depends on, the sampling activity across the board is approaching what we would call normal levels. So these are the 2 indicators that I would say, leading indicators that, a, growing confidence from brands that they're able to release the orders. And the sampling activity across the board is starting to pick up and reach near-normal levels. Now how this thing plays out between September and November is subject to many, many factors, sort of the biggest factor assumes that there is no major breakout of the virus again.

We also have a question from James Zaremba of Barclays.

A few questions, please. One question would be on your businesses where you have I guess minority shareholders as well. And it looks like profitability in those businesses was quite resilient. So I was just wondering if you could give a bit of context in terms of I suppose what the difference is there versus the other parts of the group. And then in terms of trying to understand the margin there, if you could provide kind of what share of group revenue those businesses relate to. A second question would be on kind of CapEx. I guess if I look at the run rate for depreciation and I guess internal amortization, it's around, let's say, below $30 million. So I suppose why do we not think of that as a kind of maintenance CapEx level I guess rather than anything above $15 million being more related to kind of just growth CapEx? And then one question just on mix. In terms of the adverse mix impact, is that just your customers kind of moving to, let's say, I suppose less premium, lower margin products? Or is it something else? And then lastly, sorry about the questions. I don't see anything about any kind, let's say, government grants or subsidies. Does that mean there was no benefit other than, let's say, the deferral of that tax item in the period?

Okay. So I think this is one where both Simon and are going to want to sort of help in answering the question here. Let me take part of the first one here. The minority interest largely relate to Vietnam and Bangladesh and pretty much all of East Asia, Japan, Korea, China, Vietnam, Indonesia, et cetera. They have done a good job in terms of controlling the virus. And hence, they've been relatively less impacted. Due to the tensions between the U.S. and China, et cetera, we have seen a little bit more migration out of China into Vietnam. And hence, the Vietnam business has been relatively far more resilient. And as a result of this, slightly more profits. And because of that, kind of the minority interest part of it goes up a little bit there. So that's on the minority interest. With respect to are we seeing a downgrade in terms of the mix here, now we -- well, I can give you 2 pieces of -- well, 2 data points. One is that the average price per unit across the group in the first half of the year has pretty much held up. So if we were selling, let's say, 100 units last year for $200, that's equal to essentially $2 a unit, that same ratio has pretty much held up in the first half of the year. So we haven't seen it downgrading from customers in terms of premium products to less premium products. I think a lot of that is really reflected more in the customer mix rather than in the product mix. The second point I'd like to make here is that price has held up reasonably, reasonably well. Yes, price is under pressure. Absolutely no doubt about it. But if I look at the entire first half of the year at a group level, we've had a net $2 million increase in price. So any sort of very difficult conditions, the ability of Coats to defend its prices despite low demand and low input costs and a lot of uncertainty shows that the brand is very powerful and that customers, by and large, are looking into other things rather than just low price and low price. And I've got lots of examples from the first half where competition has gone very low on prices, in some cases, up to like 40% lower than us, and we have still won the business because brands and customers are now more focused. And more so in sort of a pandemic, they're more focused on things like reliability of supply, technical service on the ground. And is there going to be any reputational risk before I deal with this question? Simon, do you want to take the rest of the questions?

Yes. Sure. Absolutely, Rajiv. Yes. So I think there were 2 further questions. One was around government. Yes. So I mean it was a very low single-digit millions that we got in terms of government support. Primarily I guess in our Western businesses, a lot of our operations are in markets, particularly in Asia where there's no government support. So that explains why it's a relatively low number in terms of that. That was in terms of sort of P&L benefit, and then we highlighted the -- we have taken advantage in terms of some of the tax deferrals that have been on offer. I think I covered that in the cash flow, and we mentioned that. I mean as far as the CapEx, which I think was the final question, James, that you asked. Yes. I mean what we've seen really and what we expect really for the balance of the year is that the elements of CapEx that we spend typically around sort of the growth productivity and some of the technology, those are the areas that are particularly reduced. But as Rajiv said, it doesn't really make sense is where we are now with relatively low volumes to be putting in expenditure around -- certainly not growth CapEx, but even productivity quite hard to deliver at these kind of levels as well. So we're very much focused for the balance of the year. Our expenditure is very much going to be around sort of ESG and particularly health and safety and anything relating to COVID. So that's my say on those ones.

Can I just follow up on the mix? I suppose if the customers aren't I suppose downgrading, what is the reason for forecasting adverse mix in the second half? What is the change I guess customers are making, which is having an impact there?

So it's basically in Performance Materials where we are seeing personal protection yarns selling a little bit more. And the average gross margins on those yarns is sort of below the group average, and that's the reason why we're seeing that.

Okay. So it's less in the A&F business.

Correct. Correct.

We have a question from Anthony Plom of Berenberg.

I just had a couple of questions. Firstly, I was just wondering if your view had changed at all with regards to kind of retailer shifting inventory this year. So I think you previously mentioned kind of best guess was 75% to 90% of the stock will kind of be shifting this year through promotions and discounts. So yes, any color there as to whether that's still the case as I guess you're still trying to work out the recovery profile for next year? And then secondly, I'm not definitely not a tax expert at all, but I think it's sort of guiding to the same effective tax rate in H2, 48%. And I thought maybe it might be a little bit better than that, considering things should be slightly more normal. So any color on that would be of course very useful.

Okay. Thank you, Anthony. So great. So I'll maybe start with the high level. So the overall industry is about $1.8 trillion at the retail sales sort of price level. We expect this to be down to 30% or roughly $550 million for the full year. So that's broadly what we are estimating it to be down. Now there are certain segments and categories which will be down much more than 30%. And then there'll be some categories like an online retailers or maybe sporting goods, et cetera, which will be down much lower than 30%. But broadly, I think 30% is where there seems to be an emerging view that it's going to be around that. Now of this, it is anyone's guess, but I think our educated guess at this point is the excess inventory, the excess of the stranded inventory coming out from the lockdowns that have happened in the second quarter and then the season being a bit sort of disruptive. We estimate that the stranded or excess inventory is going to be about $160 million. And most of the brands and retailers are focused on flushing this through the system during this year. It is our again guess that 80% of that is going to get flushed out this year and a balanced 20% will sort of spill into next year. But given that a lot of the initial actions taken by brands in order to liquidate or dispose of the excess inventory have been reasonably successful. And the way they're doing it is they are going in for sort of massive price discounts. They are selling the inventory to these large-scale price discounters like T.J. Maxx to sell it through the -- thru sort of back channel. Some brands and retailers have decided to move it to their online channel. And there are a couple of brands that are thinking of storing the goods and then bringing it back during spring, summer next year. So it's a wide sort of assortment. But I would say that from a materiality standpoint, we won't have a lot of overhang of existing inventory next year. It's going to be at most 20% coming out of this year.

Yes. I'm sorry, just following up on that. I mean that sort of 80%, is that based on kind of conversation with your customers? Or is this looking at kind of prior downturns? And what's happened? How do you I guess get to that kind of estimate?

So it's essentially triangulation, talking to consultants, talking to brands, talking to industry thought leaders, trying to sort of triangulate the data coming out of Europe, Japan, China, U.S., et cetera. And so people are kind of estimating here. I think you're going to take it with some degree of health warning here, but this is the best estimate we have right now.

Very useful.

Anthony, should I just touch on the tax point, which I think a question that you asked as well?

Yes, please.

Yes. So I think your point was around sort of second half tax rate and the like. So yes, we have seen some unusual movements in our P&L and with COVID and that's translated into the tax. But basically, 3 reasons around that is kind of adverse profit mix in some places where we've ended up with some unrecoverable losses in some markets because of the step down in performance. We also have another dynamic, which actually many companies don't, but ones that operate in emerging markets do, which is withholding tax where the -- where you're subject to that on things such as dividends or royalties and management charges and the like. Typically, those don't flex with profits, as you've seen, the movement example on revenue is less than on profits. So those have held up greater than the profit. So that has an impact. And then we've also seen a sort of a more unusual impact in terms of that mark-to-market impact. So those are the 3. We actually based our 48% looking at the full year. We looked at our base case and we based it on that. So that is a sort of a guide for the full year. The one area that I think will inevitably move around is that mark-to-market, which is largely about the U.S. dollar sterling, which we've done quite a bit of hedging on our cost there, particularly on our sort of future pension payments on that. So that could move around. And if you strip that out, it's around a 41% underlying. So that's our estimate for the year, the mark-to-market there could be some volatility in the second half. Hopefully, I've answered those.

Hanna, are there any more questions on the line? I don't believe there are. And if that is the case, I will propose we close the call. I'd like to thank everyone for joining the call today and wish you all a good day.

Ladies and gentlemen, that concludes today's call. Thank you for dialing in today, and you may now disconnect your line.